Four reasons why pharma stocks could fall out of favour as Covid recedes – The Economic Times

Clipped from: https://economictimes.indiatimes.com/markets/stocks/news/four-reasons-why-pharma-stocks-could-fall-out-of-favour-as-covid-recedes/articleshow/81156481.cms

SynopsisThe sector that had peaked out on the bourses in 2015 saw buying interest due to the focus on healthcare. However, the interest is likely to wane as Covid recedes.

ET Intelligence Group: One of the upticks of the Covid-ridden stock market was the revival of sentiment in pharma stocks. The sector that had peaked out on the bourses in 2015 saw buying interest due to the focus on healthcare. However, the interest is likely to wane as Covid recedes.

1. One-time boost from Covid drug sales
The brisk sale of Covid drugs provided an exceptional boost to the domestic sales of companies such as Cipla and Glenmark. However, it won’t be possible to maintain the increased domestic sales in the quarters ahead with the decline in the Covid treatments. Sale of Covid vaccines (when approved) could help build up domestic sales for companies like Dr Reddys Labs.

2. Resumption of regulatory work by USFDA
As the regulatory work of USFDA gains pace, companies are likely to receive observations and alerts of the drug regulator. They have to also gear up for fresh scrutiny as the regulator arranges for conducting virtual and remote inspections of facilities in the immediate term. Last week, Shilpa Medicare received an import alert from the USFDA for one of its manufacturing facilities in Telangana in relation to an inspection conducted a year ago. The stock has corrected 13% since the alert.

3. Rationalisation of API sales
The surge in sale of active ingredients by Indian pharma companies, which was visible in their June and September quarter performances, tapered down in the quarter to December performance. The bulk drugs sale had soared as part of the initial rush to source from India (an alternative to China) to secure supplies amidst the pandemic. However, as the situation normalised, the Chinese supply chains got restored and the API sales of Indian companies have got rationalised.

4. Heated Run-up
Several large, mid and small cap pharma stocks such as DRL, Cipla, Aurobindo Pharma, Divi’s Lab, Biocon, Ipca Labs, Torrent Pharma and Alembic Pharma have crossed over their record highs made in 2015 and scaled new ones during the pandemic. These stocks would need a strong trigger to scale higher in the near term. A key drug approval, uptick in the US business, resolution of USFDA issue or a strategic acquisition could serve to be such a trigger.

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